UK GDP Growth Fails to Stimulate Pound Sterling Exchange Rate

The pound sterling is still ahead versus the yen, but has been pressured against a variety of other major currencies.

The Pound Sterling exchange rate continued to weaken to the 1.3060s range against the US dollar in today's European trading session (11/March), despite the publication of UK Gross Domestic Product (GDP) data indicating stronger economic growth than the January 2022 period. Sterling is still ahead versus the yen due to expectations of UK interest rates being higher than Japan, but pressured against a variety of other major currencies.

GBP/USD Daily chart via TradingView

The pound has weakened about 1.6 percent against the euro and 0.86 percent against the US dollar over the past week or so. Sterling is even threatened to become one of the worst performing major currencies due to weak global market sentiment.

The latest UK GDP report shows growth of 0.8 percent (Month-over-Month) in January 2022, or higher than the consensus expectation of just 0.2 percent. Year-on-Year GDP growth also soared from 6.0 percent to 10.0 percent. However, these data represent the economic situation before the outbreak of the Russo-Ukrainian war.

The market no longer considers the data relevant, because the war since the end of February has torn apart the economic outlook of the region. Rising commodity prices will drive up inflation, while global growth will likely slow down. The prospect of a hike in interest rates by the British central bank (BoE) next week has shaken a little bit of sterling selling enthusiasts, but it seems unable to prevent short-term weakness.

The Guardian reported that wholesale gas for delivery next month in the UK was priced at 276p per term, or six times more than last year. This situation has a domino effect on various industries which are increasingly having difficulty operating due to higher costs, as well as households that have to save money.

Paul Dales of Capital Economics said, "Given that Omicron cases were still very high in the first half of January, some of the rebound in (economic) activity may have trickled into February as well (although hurricane Eunice may be a drag). But the hit to real household disposable income will be due to soaring energy prices, partly due to the war in Ukraine, and higher taxes will start to be felt from March and April. As such, GDP growth will probably slow through the rest of the year."

The pound sterling is classified as a high risk currency which tends to weaken amid market turmoil. History shows the pound exchange rate took a hit in the 2008 financial crisis, as well as during the outbreak of the pandemic in early 2020.

Hopes for a ceasefire between Russia and Ukraine could counter the weakening of sterling and other higher risk currencies. However, the Russian-Ukrainian negotiations in Türkiye yesterday ended in nothing.